Please enjoy this daily analysis of the real estate markets and the economic events impacting them prepared by our AI platform ALFReD. Know Better. Work Smarter. Be More Successful. Tim
Opening Summary:
The U.S. real estate market continues to show resilience and adaptation in the face of economic headwinds. Recent data reveals a mixed picture, with strong growth in new housing starts contrasting with a slight decline in new home sales. The single-family home sector is showing particular strength, while the existing home market remains constrained by low inventory. Meanwhile, the broader economic landscape presents both opportunities and challenges for the housing market as we move into the final quarter of 2024. The commercial real estate sector is experiencing significant shifts due to recent Federal Reserve rate cuts and technological advancements in the industry.
Key Takeaways:
– Housing starts surged 9.6% in August to a seasonally adjusted annual rate of 1.356 million units.
– Single-family housing starts showed remarkable strength, jumping 15.8% to 992,000 units.
– New home sales declined 4.7% in August to a 716,000 annual rate, but remain 9.8% above August 2023 levels.
– The median sales price of new houses sold in August was $420,600.
– Existing home sales data for September is not yet available, but the market continues to face inventory challenges.
– The unemployment rate stands at 4.1%, with strong job growth of 254,000 in September.
– Inflation is trending downward but remains above the Federal Reserve’s 2% target.
– Mortgage rates jumped to 6.53% following a strong jobs report.
– The Federal Reserve announced a 0.5% rate cut, with potential further cuts totaling 1.5% over the next six months.
– JLL acquired Raise Commercial Real Estate, signaling the growing importance of technology in the industry.
Detailed Analysis:
Key Economic Data & News
The U.S. economy continues to demonstrate resilience in the face of persistent inflationary pressures and high interest rates. The latest jobs report, released on October 4, 2024, showed that the economy added a robust 254,000 jobs in September, significantly exceeding expectations [U.S. Bureau of Labor Statistics](https://www.bls.gov/bls/newsrels.htm). This strong employment growth has kept the unemployment rate at a low 4.1%, indicating a tight labor market that continues to support housing demand.
Inflation, while moderating, remains a concern. The Consumer Price Index (CPI) data for September is eagerly anticipated, with expectations that it will show a continued slowdown in price increases. The previous month’s data showed inflation at 2.5% year-over-year, still above the Federal Reserve’s 2% target [U.S. Bureau of Labor Statistics](https://www.bls.gov/bls/newsrels.htm).
The Federal Reserve’s recent decision to cut interest rates by 50 basis points has injected optimism into the housing market. However, mortgage rates remain historically high, with the average 30-year fixed mortgage rate at 6.53% as of October 4, 2024, according to MortgageNewsDaily [MortgageNewsDaily](https://www.mortgagenewsdaily.com/markets/mortgage-rates-10042024).
Residential Real Estate Markets
The residential real estate market is showing signs of increased activity, particularly in new construction. According to the U.S. Census Bureau and the Department of Housing and Urban Development, housing starts in August were at a seasonally adjusted annual rate of 1,356,000, representing a significant 9.6% increase from the revised July estimate [U.S. Census Bureau](https://www.census.gov/construction/nrc/current/index.html).
Perhaps the most encouraging aspect of this report is the surge in single-family housing starts, which jumped 15.8% to a rate of 992,000 units. This marks the first monthly advance since February and suggests that builders are responding to the pent-up demand for single-family homes [Reuters](https://www.reuters.com/markets/us/us-single-family-housing-starts-surge-august-2024-09-18/).
However, the new home sales data presents a slightly different picture. Sales of new single-family houses in August were at a seasonally adjusted annual rate of 716,000, which is 4.7% below the revised July rate of 751,000. Despite this month-over-month decline, new home sales are still 9.8% above the August 2023 estimate, indicating a year-over-year improvement in the market [U.S. Census Bureau](https://www.census.gov/construction/nrs/current/index.html).
The median sales price of new houses sold in August 2024 was $420,600, while the average sales price was $492,700. These figures reflect the ongoing affordability challenges in the housing market, despite recent improvements in mortgage rates.
The existing home sales market continues to face challenges, primarily due to low inventory levels. While the September data is not yet available, the trend of limited supply constraining sales volume is likely to persist. The most recent data from August showed existing home sales at a seasonally adjusted annual rate of 4.04 million units, according to the National Association of Realtors [National Association of Realtors](https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales).
Mortgage Markets
The mortgage market experienced a significant shift last week, primarily driven by the release of a stronger-than-expected jobs report. According to MortgageNewsDaily, the average 30-year fixed mortgage rate jumped to 6.53% on October 4, 2024, up from 6.26% the previous day [MortgageNewsDaily](https://www.mortgagenewsdaily.com/markets/mortgage-rates-10042024). This marks one of the largest single-day increases in recent memory, with rates returning to levels last seen in mid-August.
The surge in rates was triggered by the Bureau of Labor Statistics (BLS) jobs report, which showed the creation of 254,000 new jobs in September, significantly exceeding market expectations. Additionally, the unemployment rate dropped from 4.2% to 4.1%, further indicating a robust labor market [MortgageNewsDaily](https://www.mortgagenewsdaily.com/markets/mortgage-rates-10042024).
While this increase in rates might seem alarming, it’s important to note that mortgage rates are still considerably lower than they were several months ago. The current market reaction reflects the complex relationship between economic indicators and mortgage rates. A stronger economy, as signaled by robust job growth, often leads to higher inflation expectations, which in turn can drive up interest rates.
However, digging deeper into the jobs report reveals some nuances that may temper long-term rate expectations:
1. Nearly 55% of the new jobs reported in the household survey were for 16- to 19-year-olds, likely representing lower-paying positions and possibly indicating an early start to seasonal hiring.
2. The average workweek declined again, suggesting that employers are trying to retain workers in anticipation of improved conditions in 2025, rather than letting them go after investing in training.
These factors, combined with ongoing concerns about consumer reliance on credit cards and potential economic fragility, suggest that while rates have spiked, they may not continue on a steep upward trajectory.
The Mortgage Bankers Association (MBA) has not yet released its latest application data in response to this rate increase. However, it’s likely that the sudden jump in rates could lead to a short-term decrease in both purchase and refinance applications as potential borrowers reassess their options.
Looking ahead, industry experts, including those at MortgageNewsDaily, anticipate that despite this recent spike, the overall trend for mortgage rates is still expected to be downward as we move into 2025. However, borrowers should be prepared for volatility, as economic data releases and Federal Reserve policy decisions will continue to influence the mortgage market.
Commercial Real Estate Markets (including Multifamily)
The commercial real estate market is experiencing a significant shift following the Federal Reserve’s recent interest rate cut and signals of further reductions. This change in monetary policy is expected to have far-reaching effects across various sectors of the commercial real estate industry.
Federal Reserve Rate Cut Impact
Last week, the Federal Reserve announced a 0.5% rate cut, bringing the target range to 4.75% to 5%. This marks the first rate cut since March 2020 and signals a potential end to the tightening cycle that has significantly impacted the commercial real estate market [NAIOP](https://blog.naiop.org/2024/09/the-impact-of-the-federal-reserve-rate-cuts-on-commercial-real-estate-markets/).
According to market expectations, we could see further cuts totaling 1.5% over the next six months, potentially bringing the Fed funds rate down from 4.75% to 3.25%. This shift in monetary policy is expected to have several positive implications for the commercial real estate sector:
1. Improved Bank Profitability: As rates decrease, bank profitability is likely to improve, freeing up capital for more lending activity.
2. Better Loan Terms: We can expect to see more loans with better terms, including lower debt-service coverage ratios (DSCRs) and higher loan-to-value ratios (LTVs).
3. Lower Interest Rates: Construction loans and commercial mortgages are likely to see reduced interest rates, making financing more accessible and affordable for developers and investors.
4. Increased Property Values: The potential compression of capitalization rates could lead to higher property values, alleviating some stress in the market and encouraging more investment activity.
However, there are potential risks to consider. If inflation remains above the Fed’s 2% target, it could delay further rate cuts. Additionally, any economic downturn could trigger more aggressive rate cuts but would negatively impact commercial real estate fundamentals.
Sector-Specific Impacts
1. Multifamily: The multifamily sector may see increased investment activity as lower borrowing costs make acquisitions and developments more attractive. However, the recent surge in single-family housing starts could potentially shift some demand away from apartments.
2. Office: The office sector continues to face challenges due to remote and hybrid work arrangements. While lower interest rates may provide some relief for property owners facing refinancing hurdles, the sector’s fundamentals remain under pressure.
3. Retail: Lower borrowing costs could help retail property owners invest in necessary property improvements and adaptations to meet changing consumer behaviors. However, the sector still faces challenges from e-commerce competition.
4. Industrial: The industrial sector, which has been a strong performer, may see continued growth as lower financing costs could spur more development to meet the ongoing demand for logistics and distribution spaces.
JLL Acquisition of Raise Commercial Real Estate
In a significant move that reflects the evolving landscape of commercial real estate services and technology, JLL (Jones Lang LaSalle) has announced an agreement to acquire Raise Commercial Real Estate, a technology-powered brokerage firm [JLL](https://finance.yahoo.com/news/jll-elevates-client-experience-leasing-130000632.html).
Key points of the acquisition include:
– Raise provides a cloud-based application designed to integrate all stages of the leasing lifecycle, from transaction and lease management to workplace and portfolio analytics.
– The acquisition will give JLL access to Raise’s industry-leading leasing technology, enhancing JLL’s existing platforms like Blackbird.
– Raise, founded in San Francisco in 2016, was the first brokerage to create a digital real estate management platform and has grown rapidly across the United States.
– Justin Bedecarre, Co-Founder and CEO of Raise, will join JLL as Head of Americas Leasing Innovation, leading the integration of Raise into JLL’s U.S. leasing business.
This acquisition underscores the growing importance of technology in commercial real estate services and could potentially reshape how leasing and property management are conducted in the industry.
CMBS / REIT Markets
The Commercial Mortgage-Backed Securities (CMBS) and Real Estate Investment Trust (REIT) markets are experiencing a mix of challenges and opportunities as we move into the final quarter of 2024. Recent reports and data releases provide insights into the current state and future outlook of these markets.
CMBS Market Trends and Issuance Growth
According to the September 2024 issue of CMBS Trend Watch released by KBRA, there is a renewed sense of optimism in the commercial real estate (CRE) industry KBRA. This positive sentiment is largely attributed to the Federal Reserve’s recent interest rate cuts and signals of further reductions. The lower borrowing costs are expected to lead to increased transaction activity and potentially higher property prices.
Key highlights from the KBRA report include:
-
CMBS issuance has shown significant momentum in 2024, with year-to-date September year-over-year issuance up by an impressive 176.5%.
-
The market is anticipating up to 15 CMBS deals to launch in October, including six single-borrower deals, six conduits, two commercial real estate collateralized loan obligations (CRE CLOs), and one Freddie Mac (Agency) deal.
-
In September, KBRA published pre-sales for nine deals totaling $7.3 billion, including four conduits ($3.6 billion), four single-borrower deals ($2.9 billion), and one Agency deal ($843.2 million).
Rising Delinquency Rates
Despite the positive issuance trends, the CMBS market faces challenges in terms of loan performance. According to Trepp data, the delinquency rate for CMBS loans has been on the rise, reaching 8.09% in August 2024 CommercialObserver. This represents a significant increase from the 4.5% rate observed a year ago. The special servicing rate for CMBS office properties has also climbed to 10.79%, up from 7.24% a year ago, highlighting the particular stress in the office sector.
REIT Market Performance
The iShares CMBS ETF (CMBS), which tracks an index of investment-grade commercial mortgage-backed securities, has shown resilience in the face of market challenges. As of October 7, 2024, the ETF was trading at $48.12, with a year-to-date performance that has outpaced many other fixed-income sectors MarketBeat.
In conclusion, the U.S. real estate market is showing signs of adaptation and resilience as we move into the final quarter of 2024. The surge in housing starts, particularly in the single-family sector, is a positive indicator of market health. However, affordability remains a concern, and the existing home market continues to be constrained by low inventory. The commercial real estate market is at a pivotal point with the Federal Reserve’s shift towards rate cuts and ongoing technological advancements in the industry. While challenges remain, particularly in sectors like office real estate, the overall outlook appears more positive than in recent months. As we await further data on inflation and the Fed’s next moves, the real estate market appears poised for cautious growth, supported by a strong job market and improving mortgage rates. Investors, developers, and potential homebuyers should closely monitor these trends and be prepared to act on opportunities as they arise in this evolving landscape.
Please check out Impact Capitol and ALFReD for yourself at www.impactcapitoldc.com